–Inflation is up. No, inflation is down. Now do you understand?

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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These two articles ran today (6/15/11) Here is the Reuters article:

May core CPI rises most in nearly 3 years (Reuters)

– Core consumer inflation rose at its quickest pace in nearly three years in May and a regional manufacturing gauge contracted this month, underscoring the headwinds facing the economy.

The Labor Department said on Wednesday its Consumer Price Index, excluding food and energy, increased 0.3 percent, the largest gain since July 2008, after rising 0.2 in April.

Core inflation was lifted by steep rises in motor vehicle and apparel prices and economists had expected the measure, which is closely watched by the Federal Reserve, to rise 0.2 percent last month.

And here is the AP article:

Consumer prices rise by smallest in 6 months (AP)

By CHRISTOPHER S. RUGABER, AP Economics Writer, WASHINGTON – Americans paid more for food, cars and clothing in May. But overall consumer prices rose by the smallest amount in six months, slowed by the first drop in energy costs in nearly a year. Consumer Price Index rose 0.2 percent in May, the Labor Department said. That’s down from April’s 0.4 percent increase. Food costs rose 0.4 percent. But energy costs fell 1 percent.

This is what makes Americans crazy. Inflation is up and inflation is down — in the same month. The reality is that inflation neither is up nor down. It cannot be measured in one-month increments. It barely is measured in one-year increments. The data are too uncertain for finer measurement.

But there is one way to predict inflation: Predict oil prices. As we have seen in previous posts, it is the price of oil, not federal deficit spending, or any other factor, that is the ultimate determinant of inflation.

Here is an interesting graph which seems to show that the year-to-year movements of inflation compares reasonably well with 20% of the energy price movements.

1

If this relationship were to continue, one would expect that a 10% increase in energy prices would correspond with a 2% increase in inflation. Tell me how much oil prices will rise or fall in the next year, and I’ll tell you how much inflation we’ll have — at least if history is repeated.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”

MONETARY SOVEREIGNTY

13 thoughts on “–Inflation is up. No, inflation is down. Now do you understand?

  1. federal deficit spending -> economic growth -> increased demand for oil -> higher oil price -> inflation

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  2. I downloaded data from the FRED site and made my own normalized graphs of CPI and Oil price (WTIC). They do not show any discernible correlation. I can’t get the graphs to show here, but

    1957-1968:

    Oil is fairly flat, a little lower in the middle, but the same at beginning and end. CPI rises throughout, going a little bit exponential at the end, ending 28% higher than it started.

    1973-1981:

    Oil rises throughout, with a jump in 1973 and a much larger jump in 1979-80, ending at over 12X its initial price. CPI rises in a fairly straight line throughout, from 1.00 to 2.51.

    1981-1999:

    Oil drops like a rock early, then fluctuates at about half its initial price throughout, except for a short spike in 1991, and ends 70% lower. CPI rises throughout, in a pretty straight line except for a small dip in 1986, ending 89% higher. The <1% drop in CPI over a few months in 1986 does coincide with a halving of the oil price.

    2000-2011:

    Oil starts out flat, then an exponential rise to 5X its initial price in 2008, then collapses back to 1.44, then up again to over 4X, ending at 3.15. CPI rises throughout, in a fairly straight line, from 1.00 to 1.34, with just a small dip in late 2008.

    The thing that jumps out is that oil goes up and down like a yo-yo, but CPI just trudges along, rising in a fairly straight line over a number of years, regardless of what oil is doing. It goes up when oil goes up, it goes up when oil goes down, and it goes up when oil stays the same.

    I don’t see how inflation (if you accept that CPI measures inflation) is responding much at all to the price of oil.

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    1. You “normalized” your graphs? As I recall, “normalize” is the word used to describe the number one multiplies the wrong answer by, in order to get the right answer. You must have used it in reverse.

      Yes, inflation goes up every year. What a shock! If you want to look at graphs that were not “normalized,” but do print, go to https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/.

      Because inflation is an annual event, the correct analysis uses “percent change from previous year”.

      Rodger Malcolm Mitchell

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      1. No, “normalize” is like how they do the CPI, 1982-84 = 100. It’s an arbitrary number against which other numbers are compared. Normalizing makes it easy to compare percentage changes in things of very different magnitudes, using the same scale.

        What you’re talking about is known in mathematics as F, the fudge factor.

        Perhaps I misunderstood you. I thought you said (and Warren says, too) there was basically no inflation since 1971 except for the rise in oil prices, and the fallout from that. But now you seem to be saying that there is a base level of inflation always, regardless of what happens to oil. That even when oil prices are falling, other prices are still rising, but just by a smaller amount?

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    1. Wonderful! Then what is the cause of it? Is it endogenous or exogenous? Is it Treasury policy or Fed policy? Or something else? What were the causes of the uptrend from 1960-1980, and the downtrend since then?

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        1. “Clearly there is inflation beyond oil prices”

          “Then what is the cause of it?”

          “Oil prices.”

          Next question: What is the mechanism by which falling oil prices (e.g., 1980-1986) cause other prices to rise? I’m at a loss to follow your logic.

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  3. Yes, there is inflation beyond oil prices, and that inflation is caused by oil prices. If, for instance, oil prices by themselves were to add 1% to total inflation, then the effect of oil prices on other commodities, will add additional points to inflation.

    Next answer, and by the way, my last answer to you. I have another life to live other than answering questions posed not for the sincere purpose of learning, but only to debate. I suggest you start your own blog — but beware: You actually will have to do research and learn and answer silly questions. Not easy.

    Rodger Malcolm Mitchell

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    1. OK, no more questions, then, just a final comment or three.

      I get how oil going up causes other things to go up, too.

      Your graph shows, from 1983-1986, 0% inflation in energy CPI and 4% inflation in non-energy CPI.

      What I don’t get is how oil NOT going up causes the others to go up, and I guess I never will.

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      1. John,

        I know this discussion is a little old (forgive me, but I needed to use some of Rodger’s charts to teach these concepts to someone else) but, beyond oil supply, supply and demand for said product can cause inflation. A lower yearly supply of corn (for instance), with all other factors being equal, can cause the price to rise.

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        1. “said product”? I don’t understand that.

          Throughout the ’80’s, computer prices were plummeting, 35% a year on average. Where was the deflation? Maybe corn was going up then, too, I don’t know. Those are changes in relative prices. It takes more MIPS* to buy a bushel. But that is not inflation. Inflation is a sustained rise in the AVERAGE price of ALL goods and services. (Our measurement tool CPI,is incomplete but is a fair indicator, as economic indicators go.)

          If there is less corn to buy some year, then corn becomes a lesser part of GDP (production). Corn prices may rise, but corn may become a greater or lesser part of consumption, depending on the elasticity of demand for corn. I might switch from corn chex to rice chex for my breakfast. If we have 100 bushels of corn one year, and they cost $1 each, then the next year we have only 90 bushels, they might cost $1.05 or they might cost $1.15. If they cost $1.05, then we have more income left over after buying corn to buy other things, and to the extent that the supply of other things is constrained, especially substitutes for corn, their prices might rise, too. If corn is $1.15, we will have less income left over after buying the corn, and the prices of other things will tend to fall, not rise, as the demand for them drops.

          Oil is different, because its cost is an input to almost everything else, at least in the cost of transporting everything else to market, and the demand is fairly inelastic: price can double, and our demand will fall maybe 10%, not 50%. Labor is that way also.

          If oil, or labor cost in general (an increase in payroll taxes, for instance) rises, then prices of almost everything will rise, and the quantity demanded of almost everything will fall.

          In the 80’s, most people expected to get a “cost of living” raise each year, based on CPI, roughly. I think what was happening then was a self-perpetuating but gradually dampening cycle of wage and price increases, where last year’s price increases caused this year’s wage increases, which tended to increase this year’s prices. Oil had nothing to do with it, as its price was flat or even decreasing for most of the decade.

          Corn is not like oil or labor, and I can’t think of anything else that is. A poor corn harvest won’t cause other prices to rise the way an oil shortage will. The price of rice or other substitutes for corn might rise, because people demand more of them and less corn, but all other goods and services are not affected, in the aggregate.

          On Rodger’s graphs, be sure to read the left and right scales very carefully. On this one, the lines overlap toward the end only because the one plotted against the left scale is 0 and the one on the right is 4. If they were on the same scale, you would get a very different impression from a quick look at the picture. Also, CPIENGSL is not equivalent to oil. We use a lot of natural gas and coal, whose prices are mostly dependent on factors other than oil prices, and some of our electric comes from nuclear and hydro, and electric is mostly a regulated utility price, not a free market price.

          *MIPS = Millions of Instructions Per Second, a measure of mainframe computer capacity

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